Indonesia: Market Profile

Indonesia’s GDP growth rose by 5% in 2016, thanks in large part to solid household consumption, and is projected by the IMF to pick up slightly to 5.1% in 2017.

The Bank of Indonesia kept the administered interest rate unchanged at 4.75% in April 2017, after cutting it six times by a total of 1.5% in 2016.

President Joko Widodo reshuffled the Cabinet in 2016 to accelerate GDP growth. In November 2016, the government announced its 14th economic stimulus package to incentivise the e-commerce and creative industries.

In 2016, FDI inflow to Indonesia reached US$29 billion, most of which went to the sectors of metal, machinery, and electronics; chemical and pharmaceutical; paper and printing; mining; and transport.

Indonesia was Hong Kong’s 21st largest export market in the first three months of 2017. Hong Kong exports to Indonesia increased by 26.8% YOY to US$746 million during this period.

Current Economic Situation

Economy

Indonesia is the largest economy in the 10-nation ASEAN[1], followed by Thailand. Service and industry are Indonesia’s main economic drivers, accounting for 46% and 40% of GDP respectively, with the remaining 14% attributable to agriculture. Major sectors include manufacturing (tobacco, food and beverages, transport equipment and machinery), mining, construction, transport and communication, finance and real estate.

In 2016, Indonesia’s economy expanded by 5%, thanks in large part to solid growth in household consumption, which accounts for more than half of the country’s GDP. Meanwhile, public spending was slightly down by 0.2% due to state budget cuts. The IMF projected Indonesia’s real GDP to pick up slightly to 5.1% in 2017, supported by private consumption and a gradual pickup in private investment in response to a recovery of commodity prices and lower interest rates.

Indonesia’s consumer price inflation reached 4.2% year-on-year (YOY) in April 2017, well within the 2017 inflation target of 3-5% set by Bank Indonesia (BI). In the same month, the BI kept the benchmark interest rate unchanged at 4.75%, after cutting it six times by a total of 1.5% in 2016.

President Joko Widodo (also known as Jokowi) took office in October 2014 with an aim to boost the economy and improve infrastructure and public services. To accelerate growth, President Jokowi reshuffled the Cabinet in 2016, with the notable appointment of an ex World Bank economist to head the country’s finance ministry.

Since September 2015, the Indonesian government has been releasing a series of economic stimulus packages to boost investment through deregulation and fiscal incentives, including streamlining approval and procurement procedures for infrastructure projects, a temporary reduction in tax on revalued fixed assets and cuts to energy prices. In November 2016, the Indonesian government announced its 14th economic stimulus packages to provide incentives to the e-commerce and creative industries.

In 2017, the minimum wage of Indonesian saw an average increase of 8.3%, with Jakarta, the country’s capital, raised the minimum wage to IDR 3.4 million (about US$252). In addition to higher minimum wages, investors would have to take into account the country’s overall business environment. According to the World Bank’s Ease of Doing Business Index 2017, Indonesia ranked 91 out of 190 economies, advancing 15 places in the rankings compared with the previous year. Starting a business and enforcing contracts were seen as the main difficulties of doing business in Indonesia.

External trade

Indonesia’s major trading partners include China, Japan, Singapore and the US. Major exports were mineral fuels, machinery and transport equipment and manufactured goods. The country’s exports remained weak in 2016, dropping by 3.9% to US$144.5 billion due to low commodity prices. In the same period, Indonesia’s imports stood at US$135.7 billion, down 4.9%. Major imports included machinery, electrical equipment, iron and steel.

In January 2017, Indonesia relaxed the ban on unprocessed mineral exports in an attempt to boost the economy and ease budgetary pressures. The ban was implemented in 2014 to promote the domestic mineral processing industry and encourage exports of higher value-added mineral products. However, the restriction caused massive revenue losses to Indonesia, a major exporter of nickel ore, bauxite and gold.

Investment Policy

The Investment Coordinating Board of Indonesia (BKPM), the official foreign investment promotion agency, is responsible for issuing foreign investment licences and improving the investment climate. It provides one-stop services for foreign investors in the licensing process. Currently, FDI in Indonesia is governed by the Negative Investment List (DNI), which stipulates the sectors that are open, wholly or partially to foreign investment.

In 2016, the Indonesian government issued a new DNI, opening more lines of business to FDI along with measures to streamline the investment process. New measures allow 100% FDI in the sectors of e-commerce, cold storage, pharmaceuticals manufacturing and film.

The Indonesian government is keen to attract FDI by streamlining investment procedures, with 70 industrial zones across 13 provinces providing 3-hour investment express service to facilitate foreign investors. Investment incentives such as duty exemption on the import of machines and income tax reduction are provided to companies given their investments fall under the designated business fields.

In August 2015, the Indonesian government announced an extension of tax holiday for pioneering industries, including oil refinery, infrastructure, maritime transport, telecommunications, downstream metal production and agriculture processing. For details of the investment environment and regulations, please refer to the official website of BKPM.

Foreign investment

In 2016, FDI inflow to Indonesia reached US$29 billion. Major FDI sources included Singapore (US$9.2 billion), followed by Japan (US$5.4 billion), the Chinese mainland (US$ 2.7 billion), Hong Kong (US$2.2 billion) and the Netherlands (US$1.5 billion). Most FDI went to the sectors of metal, machinery, and electronics; chemical and pharmaceutical; paper and printing; mining; and transport.

Under the banner of Belt and Road Initiative (BRI), Chinese enterprises are keen to venture out, including participation in Indonesia’s infrastructure projects. A Sino-Indonesian joint venture was formed in 2016 to build the 142km high-speed railway between Jakarta and Bandung. Besides, considerable scope for port development collaboration exists, as Indonesia is a key pivot on the 21st Maritime Silk Road (MSR). Meanwhile, China CAMC Engineering Company is helping in the re-development of container facilities on Batam Island, a free trade zone of Indonesia just to the south of Singapore.

Trade Policy

Indonesia is a member of the World Trade Organisation (WTO) since 1995, and has since then been lowering tariffs and non-tariff trade barriers. Import tariffs are mostly imposed on an ad valorem basis in Indonesia. The import duty ranges between 0-20% for most items, except for certain items such as alcohol, tobacco and cars, which face duties up to 150%.

Most of the imports are subject to value-added tax (VAT) in Indonesia. The standard rate of VAT is currently 10%. In addition, there is a luxury sales tax imposed on items, such as automobiles, yachts, aircrafts, properties and etc. At present, the luxury goods sales tax rates range from 10% to 125%. In June 2015, the Ministry of Finance announced to exempt electric appliances, sport equipment and certain branded goods from the luxury sales tax. In turn, these goods are subject to the standard VAT as well as an income tax that is equivalent to 10% of the purchase price.

However, exports to the free trade zones (FTZ) in Batam, Bintan and Karimun (south of Singapore) are free of import tariffs, VAT and luxury goods tax. These FTZ, particularly Batam, are popular offshore production bases for Singapore manufacturers.

A number of import items are subject to Indonesian restrictions such as special licences and limited import volume. For example, a special Importer Identification Number (NPIK), is needed for imports including textiles, footwear and electronics. In addition, certain goods are subject to Pre-shipment Inspection (PSI) as part of the Product Conformity Assessment (PCA) governed by Indonesia’s National Standardisation Agency (BSN). These products include ceramic goods, electronics, food and beverage, footwear, textiles and toys.

Free trade agreements

Indonesia is a member of ASEAN, and thus it is committed to the ASEAN Common Effective Preferential Tariffs (CEPT) scheme, under which all industrial products traded within ASEAN are subject to import duties of 0%-5% only. ASEAN has signed free trade agreements (FTAs) with China, Japan, Korea, India, Australia and New Zealand, while Indonesia has bilateral FTAs with Japan and Pakistan.

Under the China-ASEAN Free Trade Agreement (CAFTA), to which Indonesia is a signatory member, Chinese exports enjoy tariff-free access to the Indonesian market since 2005, and tariffs on most goods were eliminated by 2010. CAFTA tariff elimination is seen as conducive to further expansion of trade between the two countries. In 2016, bilateral trade between China and Indonesia reached US$47.6 billion. Under an upgraded agreement on CAFTA concluded in November 2015, ASEAN and China expect to raise bilateral trade to US$1,000 billion in 2020 from about US$480 billion in 2014.

In 2016, China was the second largest importer of Indonesia’s non-oil exports, trailing only the US. The share of Indonesian non-oil and gas exports to China increased from 8.5% in 2004 to 11% in 2016.

Indonesia has also entered into double taxation agreements (DTAs) with over 60 countries/territories including the US, Japan, Singapore and China. It concluded with Hong Kong a Comprehensive Double Taxation Agreement in 2010, which came into force in 2012.

Hong Kong's Trade with Indonesia

Indonesia is Hong Kong’s 21th largest export destination and the sixth largest destination in ASEAN. In the first three months of 2017, Hong Kong’s exports to Indonesia increased by 26.8% YOY to US$746 million. Major export items included telecom equipment & parts (40.9% share), knitted or crocheted fabrics (5.6%), computers (4.6%). During the same period, Hong Kong’s imports from Indonesia grew 7.7% to US$614 million. Major imports included coal, not agglomerated (19% share), jewellery (18.7%), edible products and preparations (12.4%).

Indonesian Involvement in the Hong Kong Economy

According to the Census & Statistics Department of Hong Kong, there were 16 Indonesian companies setting up local offices in Hong Kong as of June 2016, taking care of local businesses for their Indonesian parent companies, which include Lippo Ltd, a member of the Indonesian conglomerate Lippo Group. In addition, a number of small and medium enterprises (SMEs) are established by Indonesians in Hong Kong, with businesses in restaurants, supermarkets, and courier services.

In the first three months of 2017, there were 112,198 Indonesians visiting Hong Kong, up 18.4% from the year-earlier period.

As at 30 April 2017, there were 171,928 Indonesian nationals residing in Hong Kong.